April 10, 2006
As a person who has served as a compensation practioner, I applaud the latest efforts to increase transparency. While I agree with Mr. Cox that the SEC should not be involved in setting executive compensation, I am hopeful that the increased disclosure will help contain the growing disparity between executive pay and the pay of the rank and file employee. While I am not an advocate for restricting pay levels based on some standard such as a multiple of the average employee pay level, I am concerned that a society of haves and have nots, may lead to unrest that will negatively affect all citizens. I also would like to see greater accountability. Many Americans, regardless of pay level, are okay with high pay for success, but would like to see significant pay declines for executives if company performance is poor. I am also mindful that changes enacted in the early nineties, such as the use of the table showing key pay components for a three period, and a graph depicting company performance did not slow the growing disparity in pay levels. However, with the growing number of shareholder proposals on pay, continued press highlighting the disparities combined with greater disclosure may help turn the tide.
As for the proposals themselves, I have listed my comments below. These comments are tied to some of the questions asked in the proposed rules document. However, do the length of the document and the number of areas where comments were requested I limit my comments to a few items.
I believe the proposals outlining how compensation decisons are made, objectives, benchmarking used, etc. will go along way in helping shareholders assess the appropriateness of compensation levels. The plain English requirement is critical to making this work. I also believe the proposed rules will limit boilerplate language, but the Commission may want to consider establishing a formal review of the rules following the 2008 proxy season. Assuming the rules are in place for 2007, that would provide two proxy seasons upon which to assess the effectiveness of the rules, as well address issues pertaining to inappropriate use of boilerplate language. Knowing that the SEC will conduct this review, may limit distortions in disclosure.
I do not believe the Performance Graph is outdated. While there may be many sources for comparing company performance, I believe that the graph provides a quick snapshot as one is reading through the proxy. It is important to have a visual that is readily available.
In keeping with easy to follow, and at your fingertips data, the addition of the total compensation column is an excellent idea. The current table format can be deceptive. One might think by adding the columns together, one has the total, but that is not always the case. Today, it still takes time to review other sections of the proxy and/or other reports to try and determine the true total compensation picture.
I would also maintain the three year history. It allows interested parties to see compensation over a period of time, and provides insight in how a company may or may not be managing performance.
The one area of concern is valuation of stock options. Unlike salary, cash bonus or actual stock grants, options are difficult to value. However, by insisting on a consistent method as outlined in the proposals - Grant date fair value, it should facilitate easier comparison to peer firms and at least facilitate discussion based on a set method. My other related concern, is that the average shareholder may not be any more enlightened as to the value of options. I also support the continuance of reporting the number of shares underlying the award and other details on another table.
I support the lowering of the threshold for disclosing perquisites to $10,000. I do not believe this will be onerous for companies, and may curtail or at least inform shareholders on where money is wasted. High pay may be necessary due to competition, but shareholders should not have to pay for vacations, club memberships, etc.
I disagree with the proposal to raise the threshold from $60,000 to $120,000 for reporting a business transaction between a company and an executive or relative. These types of transactions can lead to serious abuse. Companies need to be very careful regarding potential conflicts of interest. Please consider leaving the current threshold in place.
Finally, with regards to reporting compensation on employees that are not part of the management team, but have compensation at or exceeding the levels of those reported, I am of mixed opinion. On the one hand, many may have the impression that the list does show the highest paid employees, but in actuality, employees in sales, product development or specific fields such as sports and entertainment, may actually be paid more. In some sense one can argue that the list is misleading. However, in the end I would agree with those that argue we should not include the pay of non Sr. Management employees. Because a top sales person or entertainer is not typically involved in the major decisions of the company, I would limit reporting to those who truly are in charge. One other thought, may be to go back to a time when a total was provided for all other officers as a group. While totals may not provide a clear picture, if the number of officers was included, one could at least estimate what the average pay is for all Sr. Management (Those executives governed by insider trading regulations).
Thank you for the opportunity to comment on the proposals.